Interesting question sent in from Lance:
Hi and thank you,
From my understanding most of the time the sale of the home carries a 6-7% commission of the purchase price—generally 3% for the buyers agent and 3-4% to the seller’s agent.
I could be way off and am not trying to be offensive, but it seems to me that this commission is not really based on value to the buyer and seller but instead on a generally accepted practice.
It would seem almost offensive to try to negotiate a lesser commission with a Realtor.
So this commission is not based on billable hours, but it does not seem based on value either. Why should selling a $1M home in a “sellers’ market” yield twice the commission of selling a $500K home in a “buyers’ market?”
I would love to hear your thoughts on the subject. …and again, I’m not trying to be offensive to any realtors out there—maybe I’m completely wrong.
Great question, and one I’ve never spent a lot of time researching or thinking about. It’s very similar to how advertising agencies used to be paid a commission on media spend, which of course during the stagflation of the 1970s the customers grew uncomfortable with and agencies switched pricing methods—unfortunately, they went backwards to billable hours and cost-plus forms of pricing.
That said, the commission model still probably represented value more than billable hours. Though admittedly, both are based on inputs and costs, rather than value and results.
At least the Realtors’ commission is tied to results, as no sale, no pay. I have heard of people negotiating a lower commission, but it is probably rare.
I think what you’re describing is a long-entrenched tradition, and those are very difficult to change. The Internet is providing some pressure, since there are now Web sites to help you sell your own home. But the opportunity cost of time and trouble is simply too large for most people to fret over, so they gladly pay a commission. That is the price we pay for being a wealthy country.
I’m not sure this answers your question, and I’d love to hear other theories.